Cuts will get worse before market improves

March 3, 2015

Industry cost-cutting and job cuts will get worse before it gets better, industry leaders told a business seminar in Aberdeen on 3 March.

But, despite the gloom, they also said that the industry also needed to send out a more positive message, in order to continue to recruit talent, and make sure that it captured efficiencies gained amid the oil price lull, instead of falling back into a high price cycle.

Speaking at Oil & Gas UK and KPMG-run event, Beth Mitchell, an independent consultant and advisor, said that in previous cycles, the oil price had fallen to 40% below its peak, 16 months after the peak, implying that a $69.6 Brent price would be the new form when the oil price recovers.

To cope with this new reality, cost cutting would be inevitable and has already started, but, cuts made to date by the industry imply a $70-75 oil price for 2015, whereas the two-year forward price is at $60-65, suggesting more cuts will need to be made, says Mitchell.

Explaining the fall in the oil price, she said there was a fundamental oversupply in the market, twinned with Saudi Arabia abandoning its role as a swing producer, to offset the oversupply.

"What we see happening is the market is now in charge,” she says. “It was clear by 2012 we had moved from an era of oil scarcity to one of abundance. We have shale, tight oil, ultra-deepwater. Oil was starting to come from the Arctic. This should have been telling companies to re-position themselves on the cost curve. The final straw was the change in the Saudi oil policy [to one of market share, rather than price setting, targeting US shale].”

The low seen in January was also impacted by financial positioning with a high degree of short positions drawn up, which then closed out in January.

"The question now is how long will it take for a real adjustment on the supply side?” she says, suggesting a year to 18 months. “Although we have seen cuts, we have not seen production fall, it has kept growing [including from Canada, Gulf of Mexico and Iraq, with the potential for Iran to also bring more oil onto the market, subject to a deal being reached over its nuclear program]. Clearly, the longer it takes to have an impact on production, the larger the impact will be.”

And while the Saudis were targeting shale, it is more likely that Arctic, tar sands, ultra-deepwater, and some shale, projects will be the areas affected, says Mitchell.  

For the UK North Sea, a key requirement is for the tax regime, seen as being too high and too complicated, to change. "We need to be realistic to attract investment,” Mitchell says. “The North Sea needs a different tax incentive structure. It was put together in a very different era. It is so complicated it makes your ears bleed thinking about it.”

Bob Keiller, international engineering group Wood Group’s enigmatic CEO (pictured left) also spoke at the event, urging the industry to work together. There have been job losses and there will be more, he warned.

But, he suggested four areas where companies could make efforts to prevent job losses in the mid-long term; through better messaging about the industry; finding alternatives to redundancy, such as offering sabbaticals or reduced hours; changing behaviors, so that short term efforts to reduce waste and improve efficiency become codified in business culture; and by preventing costs from ballooning again. 



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